Thoughts on a Long-Awaited Natural Gas Exports Study

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Earlier today, the Department of Energy released a long-awaited (and long-delayed) study on the macroeconomic impacts of liquefied natural gas (LNG) exports. The study, prepared by the consultants NERA, is the most in depth look at the economics of LNG exports published to date. That means it’s long, and will take a while to digest. Here are a few quick observations and context. I’ll write another post later on differences between the NERA results and what I reported in my own LNG exports study earlier this year.

The study reaffirms that allowing exports would be good for U.S. economic growth. No matter how NERA sets up its model – different assumptions about U.S. gas resources, domestic demand, or international markets – the U.S. economy as a whole benefits from allowing exports. This shouldn’t be a surprise: the fact that economies gain from allowing trade is pretty robust.

The negative headline from the report is that allowing exports would lower average real wage income. This happens despite little or no impact on nominal wages; it is due to higher natural gas prices, which imply slightly lower average real wage income. As an isolated matter, this is fairly uncontroversial (though the impact on income after taxes and transfers like LIHEAP is unclear), but I have concerns, which I’ll explain below.

Either way, all of the macro numbers are pretty small. U.S. economic welfare rises by between roughly 0.005 and 0.015 percent in most scenarios. Impacts on GDP can be a factor of ten higher – still relatively small. No sector loses more than 1 percent of output (aside from electricity generation in an extreme case); manufacturing, for example, loses between 0.05 and 0.25 percent. Real wage income typically declines by about 0.1 to 0.2 percent.

The study also supports those who are skeptical that large-scale LNG exports will materialize, but suggests that there are ways for that to happen. When NERA assumes the DOE reference cases for U.S. and international natural gas demand, no exports result, because they are uneconomic. If U.S. gas resources are scarcer than mainstream estimates suggest, exports only materialize given extreme international demand, and only at low levels. Almost all cases come in at or below the 5-6 bcf/d that analysts often assume. Only when NERA combines assumptions of surprisingly high availability of U.S. natural gas and a complete shutdown of the Japanese nuclear industry does it see exports approach 10 bcf/d by 2020. When it adds on an end to the Korean nuclear program, and supply shortfalls elsewhere in the world, it projects as much as 12 bcf/d in exports by 2015 and 15 bcf/d by 2020. It is difficult to imagine the path to that much investment, particularly by 2015.

Despite these often-massive export volumes, NERA projects consistently limited natural gas price impacts. In only one scenario – higher than expected U.S. shale resources and massive international demand leading to very large exports – do prices rise by more than a dollar for a thousand cubic feet in the next decade. (They rise by $1.11 in that case.) Most results see an increase closer to fifty cents. One can turn this around: substantial exports only exist because price rises are limited; if prices rose quickly, the economics of exports would collapse, limiting volumes. A corollary is that U.S. prices always remain well below overseas ones despite exports.

The study, like any, has some non-trivial limitations. It assumes full employment, which makes it impossible for natural gas exports boost U.S. employment (through a positive demand shock) in the short run. This is a particularly important limitation for the scenarios with large LNG exports by 2015, since the economy will presumably remain substantially away from full employment by then. It is unclear from the text, but as best I can tell, blocking U.S. exports in the model does not lead to higher exports from Canada, even when the economic incentive for Canada to export is very strong. This is misleading, and important, since exports from Canada would have the same negative consequences for the United States as U.S. exports, but would have fewer of the positive ones. (In particular, Canadian exports would also depress real U.S. wage income.) I would also be interested to drill down on the manufacturing output and employment estimates. The study lumps together all natural gas production in determining the demand that gas production creates for manufactured inputs. To the extent that shale gas is more manufacturing intensive than other gas production, this will underestimate manufacturing employment.

Perhaps the most important limitation is that it assumes no misfires by investors. The macroeconomic impacts of natural gas exports could be quite different if there was significant over- or under-investment in export facilities. That is not a crazy possibility, particularly given the massive uncertainties present here. (It’s also a possibility that I neglected in my own study.)

It’s also important for policymakers to put the results in context. Whatever the direct impact of U.S. LNG exports on the economy, the bigger policy stakes may lie in what a U.S. decision would mean for the global trading system more broadly. That could have larger impacts on GDP and real wage income than gas exports themselves.

Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions.

Canada is crucial. As Michael Levi correctly says blocking US LNG exports will have little effect on US LNG prices unless Canada is blocked from exporting LNG. Then the only effect of the ban is to have the export facilities in British Columbia and not on the US Gulf Coast.
Even banning US exports of natural gas to- which would require that the US denounce its free trade agreement with Canada would have little effect since Canada is a net exporter of natural gas to the US and can without US permission reroute its exports from the US to East Asia.
This could be prevented if the US Navy is put into action as Senator Wyden is likely to suggest.

Posted by dunceDecember 7, 2012 at 4:39 am

Over or under investment is only possible in the short term in a free enterprise system. The misallocation of capital is a characteristic of centrally planned economies. The best plan is for the government to get out of the way and let progress happen.

Posted by Michael BerndtsonDecember 8, 2012 at 4:57 pm

So no environmental impact costs associated with climate change, air quality and water supply? So we can assume federal and state environmental regulations continue to be worked-around by O&G producers and think tanks?

Posted by buck smithDecember 9, 2012 at 4:49 pm

The US federal government coulod offset any price increase from exports simply by leasing a large amount of federal land for gas development. This would cause those evil oil companies to pay money to our federal government and maybe moderates its desire to tax us into penury.

Posted by Levis KochiinDecember 10, 2012 at 6:55 pm

It is far less costly to obtain any environmental improvement by directly aiming at the environmental effect of natural gas production than to try to block particular uses of natural gas including exports.
For example, perhaps the US Congress should ban the sale to Mr. Berndston of natural gas, of electricity generated from natural gas and of food grown with fertilizer derived from natural gas. Since much of US oil is produced as a product of fracking perhaps Congress should ban the sale to Mr. Berndtson of heating oil and gasoline as well. Such legislation would probably reduce pollution but at a cost (mostly to Mr. Berndtson
far greater than the cost of reducing pollution by an equal amount by greater regulatory efforts or explicit taxes on pollution.
Note that Michael Levi’s report – extensively discusses the adverse environmental effects of natural gas production.

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